UK shares suffer biggest fall since July after Fed rattles investors

A worker shelters from the rain as he passes the London Stock Exchange in the City of London at lunchtime October 1, 2008.

Reuters/Toby Melville

LONDON (Reuters) - Blue chip shares posted their biggest one-day loss since July on Thursday on concerns the Federal Reserve could end its stimulus programme sooner than expected, removing a driver of the recent equity rally.

The FTSE 100 closed down 103.83 points, or 1.6 percent, at 6,291.54, dropping below the 6,300 level for the first time in 10 days. Stocks that benefit the most in rising markets, or "cyclicals", fell furthest.

The index's decline was the biggest since last July, at the height of the euro zone crisis and just a few days before European Central Bank chief Mario Draghi promised to do "whatever it takes" to save the euro, prompting a global rally in equities.

Commodity stocks and banks combined to take over 50 points off the FTSE 100 index, and volatility jumped 13 percent.

Investors became cautious after minutes of the Federal Reserve's January policy meeting showed a number of policymakers think the U.S. central bank might have to slow or stop its asset purchase programme before seeing the pickup in hiring the programme is designed to deliver.

"The biggest impact (on today's falls) has been the Fed minutes, and supposedly a more hawkish tone by the Fed," James Butterfill, global equity strategist at Coutts, said. Still, he expected the Fed to continue with asset purchases, or quantitative easing, in the near term.

"It's also off the back of how much markets have run up year to date. We've already surpassed our base-case fair value on the FTSE within the first month and a half, so it's not surprising we'd see a pullback."

The market had closed at a five-year high on Wednesday, marking an 8.4 percent gain so far this year, against a 5.8 percent rise for the whole of last year.

Also weighing on sentiment on Thursday were worse-than-expected euro zone purchasing managers surveys, which dealt a blow to hopes the currency bloc might emerge from recession soon.

Mining stocks were the biggest drag on the FTSE 100 as concerns about an end to U.S. monetary stimulus hit a sector already hampered by weaker metals prices and market talk of a hedge fund liquidating big positions in commodities.

BHP Billiton was among the worst off, tumbling 4 percent. It extended falls from the previous session when it reported its worst profit drop in more than a decade, with Citi downgrading its rating on the stock to "neutral".

All but seven blue chip stocks fell in the broad-based sell-off. Defence firm BAE was the biggest riser, gaining 4.1 percent, as investors welcomed news of a share buyback and the company's decision to lift its dividend by 4 percent despite posting a fall in profits.

BUYING THE DIPS

Though the index fell below 6,300 it remained in the range between 6,200 and 6,400, which it has been in all month, with some seeing the dip as an opportunity to buy.

"We're absolutely due weakness right now, and the question is when one buys into it, providing the trends remain positive," David Esfandi, Managing Director at Ashcourt Rowan Asset Management, said.

"A couple of percent further weakness would be very much welcomed as a buying opportunity, although the data still needs to be monitored closely."

The intraday low of 6,277.96 was near resistance areas being targeted by traders as opportunities to buy back into the FTSE.

"The market is still looking to push higher but we still see some short term weakness before the next move higher," Atif Latif, director of trading at Guardian Stockbrokers, said.

"On the downside 6,250-6,275 will have to hold for the next upside move to 6,415-6,550."